Giorgio Sacerdoti & Paola Mariani (Bocconi University)
This article is a proposal which will be discussed in future blogs.
(a) The situation envisaged under the Backstop.
Let us first recall the terms of the issue. During the transition period (which will last until, at the latest, December 2022), the UK government will negotiate other future relationship with the EU, including trade rules. Of particular focus is what will happen along the Irish border—the UK’s only land border with the EU. The agreed requirement that no “hard border” be established within Ireland limits the options available as to the possible FTA models or in any case their application. Additional political requirements are that the unity of the UK market (no custom regime difference nor checks between Northern Ireland and the rest of the UK) as well as the unity of the EU single market be preserved (no custom regime difference nor checks between the Republic of Ireland and the rest of the EU)[mfn]See par. 49-51 of the 8 December 2017 JOINT REPORT FROM THE NEGOTIATORS OF THE EUROPEAN UNION AND THE UNITED KINGDOM GOVERNMENT: 49. The United Kingdom remains committed to protecting North-South cooperation and to its guarantee of avoiding a hard border. Any future arrangements must be compatible with these overarching requirements. The United Kingdom’s intention is to achieve these objectives through the overall EU-UK relationship. Should this not be possible, the United Kingdom will propose specific solutions to address the unique
circumstances of the island of Ireland. In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all island economy and the protection of the 1998 Agreement. 50. In the absence of agreed solutions, as set out in the previous paragraph, the United Kingdom will ensure that no new regulatory barriers develop between Northern Ireland and the rest of the United Kingdom, unless, consistent with the 1998 Agreement, the Northern Ireland Executive and Assembly agree that distinct arrangements are appropriate for Northern Ireland. In all circumstances, the United Kingdom will continue to ensure the same unfettered access for Northern Ireland’s businesses to the whole of the United Kingdom internal market. 51. Both Parties will establish mechanisms to ensure the implementation and oversight of any specific arrangement to safeguard the integrity of the EU Internal Market and the Customs Union.”
[/mfn].
If/until those negotiations don’t lead to any agreement on the future relationship, the UK will continue to trade with the EU under the backstop arrangements following the end of the transition period. Under the backstop, the whole of the UK enters a “single customs territory” with the EU. Essentially there will be no tariffs on trade in goods between the UK and the EU and additional measures are provided to ensure the level playing field. The alignment of Northern Ireland with the EU custom territory rules for goods might be stricter than in respect of the rest of the UK in order to ensure that the border between Northern Ireland and the Republic of Ireland will remain open as it is today. If in some respect distinct regulation would apply in Northern Ireland some checks on goods entering Northern Ireland from the rest of the UK would become necessary.
Under the backstop, no-hard border does not mean that there will be no custom regime distinction at all between N. Ireland and the rest of the UK. As acknowledged the EU Commission Fact sheet of 14 November 2018[mfn]Protocol on Ireland and Northern Ireland, Brussels, 14 November 2018, Memo-186423_EN.pdf[/mfn]:
“Will Northern Ireland be in a different customs territory to the rest of the United Kingdom?
No. Northern Ireland will form part of the same customs territory as the rest of the UK, which forms a single customs territory with the EU Customs Code will have to be applied. However, under the backstop and in order to avoid a hard border, Northern Ireland businesses can place products on the EU’s internal market without restriction. Placing goods on the internal market that come from outside of Northern Ireland requires that the processes provided for in the Union Customs Code will have to be applied.”
Will Northern Ireland remain aligned to the rules and regulations of the EU? Will Northern Ireland have to apply the EU’s Customs Code?
In order to avoid a hard border on the island of Ireland, and to ensure that Northern Irish businesses can place products on the EU’s Single Market without restriction, it will be necessary for the UK in respect of Northern Ireland to maintain specific regulatory alignment with the EU, as has been agreed between the EU and the UK in the December 2017 Joint Report.
This means that Northern Ireland will remain aligned to a limited set of EU rules that are indispensable for avoiding a hard border, namely:
● legislation on VAT and excise in respect of goods
● legislation on goods standards
● sanitary rules for veterinary controls (“SPS rules”)
● rules on agricultural production/marketing
● state aid rules.
As explained above, the EU’s Customs Code will also continue to apply in Northern Ireland within the overall context of the single customs territory between the EU and the UK.”
The resistance against the backstop is due of course to the fact that it would englobe the whole of the UK in a single custom area with the EU, for the sole scope of avoiding the hard border in Ireland and ensuring that Northern Ireland remains fully aligned with the EU.
We submit that a different solution could be envisaged, that ensures free trade with no-controls within Ireland, without tying the whole of the UK to the EU custom territory’s regulations, while respecting the basic parameters of not breaching the unity of the UK market on the one hand, and of the EU custom territory and single market on the other hand[mfn]Such a solution could be agreed in an additional protocol to the Withdrawal Agreement, to enter into force if no alternative agreement is concluded before a certain data ( timely before the end of the TP to enter into force at its end) or as a separate agreement, see for this technique the proposal by prof. Kenneth Armstrong, An “Implementation protocol” to Unblock the Brexit Process, Discussion Paper, Univ. of Cambridge, 19 February 2019[/mfn].
(b) Using the GATT exception for frontier traffic to avoid a hard border within Ireland while allowing the UK to pursue an independent international trade regime.
A little explored provision of GATT would make this possible as to trade relations also in respect of other WTO members. Article XXIV.3 states that the GATT “shall not be construed to prevent: (a) Advantages accorded by any contracting party to adjacent countries in order to facilitate frontier traffic.” In practice this means that any such facilitation would not be subject to most-favoured-nation (MFN) obligations, so that if reciprocal trade between the two territories would be exempted from custom controls and other restrictions of trade, other WTO members could not complain that their goods would be subject instead to custom duties when exported to the same territories.
There is no definition of “frontier traffic” in the GATT, so that it can be assumed that a regime covering an area as large as the whole of Ireland could be admissible, although extending well beyond a traditional concept of local commerce adjacent to a border. A bigger issue would be how to avoid circumvention (notably as to rules of origin), that is further shipment of goods benefiting from this regime for final destination in the rest of the UK, and, on the other hand, further shipment of Northern Ireland goods from the Republic of Ireland to the continental part of the EU[mfn]An even more liberal model is in place in Cyprus that rests on the Protocol of Accession and the so-called “Green Line Regulation” (EU Council Reg. 866/2004): Goods produced in Northern Cyprus are considered of EU origin; they can enter the Republic of Cyprus without custom duties and automatically circulate within the whole of the EU single market. A consultation clause may be triggered in case of circumvention, probably should goods originating from Turkey be exported from Northern Cyprus as locally produced goods. This regime stands as a good model mutata mutandis for our proposal and its implementation[/mfn]. Some controls at the ports of Ireland would be inevitable and possibly controls within Ireland as to goods that would not be entitled to freedom of circulation because originating from outside the island. What is important to stress in this respect is that all these controls – random, occasional per samples, not necessarily physical, nor at the border or at the ports but possibly at origin or destination – would not be border controls entailing physical barriers but rather anti-fraud / anti-circumvention checks[mfn]See for some ideas on controls not at the bordr J. Weiler, A Frontstop Appraoch to the Backstop Conundrum, ejiltalk.org blog, 21.1.2019[/mfn].
In order to explore the feasibility of such a regime one should consider different scenarios of as to the future UK custom and trade regime and its relations with the EU.
a)As long as the UK remains in substance/de facto aligned with the tariff regime of the EU as declared at the WTO and its standards for good, the proposal would present no problem and would make no difference as compared with the Transition Period;
b) Problems arise, and solutions must and may be found if/when the UK adopts different product standards and different tariffs on certain products compared with the EU (possibly also in the reciprocal trade), notably by concluding FTAs providing for different tariffs with third countries for their goods entering into the UK market – all such developments being natural sooner or later. The absence of any border control in Ireland would entail for both the EU and the UK the unacceptable consequence of having to admit “non-conforming” products (as to standards or custom duties exemptions/reductions) in their respective territories, even beyond the island.
(c) Basic features of “All-Ireland Common No-Custom Area”
The underpinning of a frontier zone is however exactly that of making an exception to the general custom and product standard requirement for products that originate and circulate only within the designated area[mfn]Such as frontier area had been agreed between Italy and Yugoslavia (but never effectively put in place) in connection with the Osimo Treaty of 1975 settling all matters still pending as to the final and official border between the two countries as a result of WWII[/mfn].”Non-conforming” products originating from one part of the island would thus be authorized to freely enter the other part. To facilitate such circulation each party should enact product standards or negotiate tariffs relevant for those products with an eye on the All-Ireland agreed free circulation regime in mind. Lists of conforming products could be agreed that would be admitted to free circulation. Other products, especially those not originating from the island, would be subject to duties with designated modalities[mfn]Each Party could unilaterally adopt the Cyprus model mentioned above at note 23: thus the EU could decide that Northern Irish goods, imported under the Area regime in the Republic of Ireland could be considered of EU origin and freely circulate in the whole EU[/mfn].
The limitation of free circulation to original products is a key feature. First of all to ensure WTO-conformity; secondly to avoid creating a loophole in the future UK custom regime[mfn]Our proposal is thus not open to criticisms voiced at the idea that the UK could unilaterally open its border to EU products into and through Ireland, something our solution does not entail, see Business attacks UK Northern Ireland tariff plan for no Brexit, FT 13.3.209; [/mfn].
Such a regime would be greatly facilitated in its operation by the fact that a great percentage of intra-Ireland trade is indeed made of products originating in the island, especially agri-food products. As per official data 33% of Northern Ireland’s goods exports (all sales outside of the UK – which were £ 10.5 billion) went to the Republic of Ireland in 2016. That was worth around £2.7 billion. The Republic is Northern Ireland’s single largest export destination, worth around £800 million more in 2016 than its goods sales to the rest of the EU (not including the UK) combined £ 1.9 went to the rest of the EU and£ 3.7 to the rest of the world[mfn]Micro and small businesses (with fewer than 50 employees) accounted for 93% of Northern Ireland’s exporters (not deliveries) to Ireland, and 46% of the value of its exports there. All information, particularly in footnotes from https://fullfact.org/europe/irish-border-trade-checks (accessed 22 March 2019). For a comparison it would be interesting to have also the data on how much export from the EU – and specifically originating from the Republic of Ireland – were imported in the rest of the UK, and vice-versa.[/mfn]. In the same year, around 1.4% of the Republic’s goods exports went to the North (worth around £1.3 billion based on exchange rates at the time). In 2017, it was 1.6% (worth around £1.7 billion[mfn]At the moment only a small number of non-EU goods entering the UK or Ireland are subject to physical customs checks. In the case of the UK, all non-EU goods have to be declared, this is usually done electronically and happens in a matter of seconds. Irish tax authorities told a committee of Irish parliamentarians that in 2016 “6% of import declarations were checked and less than 2% were physically checked”. The Chair of Irish Revenue told the Irish parliament in 2017 that it’s “very unlikely” that anything like 2% of goods crossing the border between Northern Ireland and the Republic will be physically checked, due to the types of goods being traded[/mfn].
Moreover the type of trade, almost predominantly “local” has to be considered: according to the 2017 UK government position paper on Northern Ireland and Ireland (par.38):
“Internal trade between Northern Ireland and Great Britain is of critical importance to Northern Ireland’s economy. In 2015, external sales of goods from Northern Ireland to Great Britain stood at £10.7 billion (22 per cent of all NI’s sales in goods by value).28 Trade between Northern Ireland and Ireland is also very important. Over the same period, Ireland was Northern Ireland’s biggest external trading partner, exporting £2.7 billion of goods to Ireland (6 per cent of all NI’s sales in goods by value and 36 per cent of NI’s total goods exports).29 Similarly, Ireland-Great Britain trade is significant. In 2016, Great Britain exported goods worth £13.6bn to Ireland and imported £9.1bn.30 When considering cross-border trade, it is particularly important to note the integrated nature of the agri-food sector. Food, beverages and tobacco account for 49 per cent of cross-border manufacturing trade, with, for example, more than 10,000 pigs exported from Ireland to Northern Ireland every week and a quarter of all milk produced on Northern Ireland’s farms exported for processing in Ireland”.
To conclude, the proposed solution would not be radically different than the backstop as applied within Ireland, would grant freedom of external trade relations to the UK and would not entail a custom barriers between Northern Ireland and the rest of the UK: products from the rest of the UK would enter Ireland freely and vice-versa, but would not benefit to freedom of export to Ireland ( nor from there on to the rest of the EU) under the special conditions of Intra-Irish trade. Vice-versa, products from the Republic of Ireland (or possibly from the rest of the EU) could not from Northern Ireland go on free of checks and imposable duties to the rest of the UK.
Paola Mariani is an Associate Professor of EU Law at Bocconi University
Giorgio Sacerdoti is Professor Emeritus of EU Law at Bocconi, a former Chairman of WTO Appellate Body and Member of the Scientific Committee of DCU Brexit Institute